Release date: December 15, 2009
Guest: Rick Biscaro
Running time: 11:56 minutes
Understanding the advance ruling process from the CRA’s sightline is essential. PwC’s Rick Biscaro, a former CRA director, discusses how to handle a hot audit situation, among other issues.
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You're listening to another episode of PwC's Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today's busiest tax directors.
Gerry Lewandowski: Here with us today is Rick Biscaro, a member of PwC’s Canadian National Tax Services group in Toronto. For more information on this group, please visit www.pwc.com/ca/cnts. Rick is a former director, CRA Income Tax Rulings Directorate, and an original member of the CRA’s General Anti-Avoidance Rule (or GAAR) Committee. Having served on this Committee for eighteen years, Rick is widely recognized as one of Canada’s foremost experts in assessing the potential application of GAAR to a number of high-value transactions. In today’s podcast, Rick will share with us some of his thoughts on the advance rulings process and how the GAAR Committee functions.
Thanks for joining us, Rick.
To start off, let’s discuss the advance rulings process in general. How does the CRA’s rulings process work from a practical standpoint?
Rick: Well, first let me tell you what the mandate of the Directorate is. It was established principally to give the CRA interpretation of the law, and to establish policies related to the law and the agency will interpret the law to reflect government policy the provided the words and the provision permitted to do so. So that aside, or that included, the agency provides certainty with respect to proposed transactions and this is one of the main mandates of the Rulings Directorate. And when they do issue a ruling, it’s binding on the agency and not binding on the taxpayer, which a lot of people may not know. The agency will rule on completed transactions but the requirement is that a tax return can’t be filed in the process of the ruling request.
Now there are time limits for providing rulings. There are 60-day turnaround for a ruling and 120 days for technical interpretation. Rulings can be invoked and that will incur when facts, all materials facts, are not disclosed or when the agency may have made an error in the interpretation of the law. All rulings are subject to review by CRA when they conduct an audit and that is twofold, two reasons therefore for reviewing the ruling. One, to be sure the facts are correct as stated by the taxpayer and two, to make sure the taxpayer carried out the proposed transactions as indicated in the ruling.
Gerry: So, how do the rulings people at the CRA interact with other areas of the CRA?
Rick: Well, there’s daily interaction and various areas of the government, not just the CRA, that are contacted. For example, finance in the context of a ruling or a technical interpretation they will talk to finance about policy issues, about the reasons why a particular rule was written. They get involved with drafting legislation with the department of finance. They will deal with audit headquarters and the tax services offices in the context of referrals made to the Rulings Directorate. Generally, they will involve interpretation of the law.
For example, ruling on a tax shelter. Now the agency will consult with the Tax Avoidance to make sure they don’t have any concerns with respect to that particular ruling. Appeals Directorate, there is frequent interaction with appeals on interpretations of the law clarification of interpretation bulletin positions. And when there is an adverse decision and the agency is considering appealing the decision, the rulings people are contacted for their reviews on the…whether or not the agency should appeal.
Gerry: So, if I have a dispute with my tax auditor, do I have any recourse to rulings, and if so, will using such a recourse jeopardize my relationship with the tax auditor or my large case file manager?
Rick: This is something that is dear to my heart because I had decisions with practitioners in the past about this before I joined PwC. The answer is yes. Taxpayers and representatives do have recourse to rulings when there is a technical dispute with the tax auditor, although the auditors don’t like it and may refuse to do so. Taxpayers do have that right. Rulings will give it an object review; however, there is no guarantee that the they will agree with the taxpayer and similarly no guarantee that they will agree with the with the CRA auditor. The taxpayer can expect professional and fair treatment from the auditor and should not be concerned that a request to rulings will jeopardize the relationship with the auditor.
Gerry: Typically, what kinds of issues should be confirmed through the advanced tax ruling process and generally, what are the criteria for qualifying for an advanced tax ruling?
Rick: Well, let’s deal with the issues first. Complex, proposed transactions where the law or perhaps the administrative position is not clear should be in my view, referred to, or a ruling should be requested. Due diligence issues, particularly when you are looking at large tax dollars at risk, I think that these types of transactions should be subject of an advanced ruling request.
A unique transaction where there is no jurisprudence or no publically stated CRA position is one that should be referred for ruling request and of course any particular transaction where there is a GAAR application that’s a general anti-avoidance rule and there is uncertainty with respect to where the agency is coming from a ruling request is probably the best route to take.
Now, in terms of criteria, the transactions have to be proposed. You have to be seriously contemplated. They can not be under review by the agency or before the courts and the transaction should not be identical to one that was completed in a prior year, so no tricks allowed. Transactions that say meet some but not all the requirements of the CRA admin position are some that fall into criteria for a ruling request and generally the transactions must be completed within six months of the date of issuing the ruling letter.
Gerry: So, the real question is what kinds of matters should not be submitted for an advanced tax ruling, and if not why?
Rick: Well, let me outline the kinds of transactions that should not, and perhaps when I do that the “why” should be self-explanatory. Rulings Directorate will not entertain a transaction that is hypothetical. So in other words, they have to be seriously contemplated. Hypothetical transactions will be dealt with in the context of a technical interpretation, not a ruling. Alternative transactions (and by that I mean if you send in a ruling request and you have three or four different ways of undertaking the proposed transactions), it will be immediately sent back to you and you’ll be asked to choose which road you are going to go down and the director will rule on that path. Not on any other.
Income versus capital transactions will not be entertained vis-à-vis a ruling request. If you are looking at fair market value determination of property, that won’t be entertained as a ruling request. Opinions on GAAP or commercial practice are not in the domain of tax interpretation so, forget asking about those in the context of a ruling request. Factual ruling request, where all the pertinent facts cannot be determined at the time of the ruling request, they will not be considered either; however, if you do have all the pertinent facts with respect to a factual determination that you are asking for a ruling on, the agency will entertain that.
Interpretations of foreign law, no go, and as well, interpretations of draft law or regulations. No formal ruling request, but vis-à-vis draft law the director will take opinions.
Gerry: I am dealing with an important transaction, and I need to get an understanding of whether I have any issues that may fall within the General Anti-Avoidance Rule, or GAAR. Do I deal with this through the advance ruling process or in some other way?
Rick: Well, if we’re looking at the post transactions, you’re looking at the advance ruling process. If you are looking at transaction that is completed but the taxpayer’s return is not filed yet, the Agency has the process called ”real-time audit,” under which the taxpayer—if the taxpayer wishes—can refer the transaction to head office in the context of a request for a ruling on it and the rulings people will deal with that particular transaction.
Now let’s get back to the proposed transaction involving GAAR. What would be required there is the same type of information as with any other ruling request and that you go to the information circular 70-6R5 to get that information. The rulings people will look at the request and they will look at your authorities to support the application and non application of GAAR, come to a recommendation, and submit it to the GAAR committee.
Now something about the GAAR Committee. It is made up of various areas of the agency and other departments, principally the members of the Committee are all directors and director general of rulings. We have three or four officials from the Department of Finance. There are two managers from Tax Avoidance, which I call Tax Avoidance it’s now Aggressive Tax Division, which is in audit and two members from the Justice Department. So the issues are considered. They are discussed and debated and I really do mean debated and the decision is made to apply or not apply the GAAR. Sometimes the decision is deferred, and in those instances what happens is there is not sufficient evidence to support the position of the referring area of the Agency. Either rulings or audit and the auditor is asked to go back and get more information or the rulings people are asked to go and find other authorities to substantiate their position.
Gerry: Rick, can a submission on a particular matter be made directly to the GAAR Committee by a taxpayer?
Rick: No, the Committee is administrative only. It was set up in 1988 to centralize decisions to be consistent and principally to allay fears of representatives and taxpayers that the auditors meaning Tax Avoidance will get out of control with their new toy.
Gerry: Can a taxpayer ask the CRA or the GAAR Committee itself to reconsider a decision on a particular matter?
Rick: Yes, that is possible. It happens but in my experience rarely and the Committee will entertain or resubmission by a taxpayer or representative where they have new facts to bring on to the issue or they have new authorities to support their position.
Gerry: Rick, I would like to take this opportunity to thank you for your insights into the CRA, the advance ruling process and the GAAR Committee. As mentioned earlier, Rick is part of PwC’s Canadian National Tax Services group and provides services to companies in respect of:
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.